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Reborn, old U.S. airlines look to soar again

A Northwest Airlines jet pulls away from the gates at the Detroit Metropolitan Airport. The airline emerged from bankruptcy protection late last month, slimmed down and ready to soar.Carlos Osorio / AP

When Northwest Airlines emerged from bankruptcy protection May 31, it marked the first time in almost five years that no major carriers were in bankruptcy proceedings.

Like other carriers that filed for protection from creditors in the years since terrorist attacks of Sept. 11, 2001, Northwest has emerged slimmer, with a lower cost structure and ready to soar.

And some analysts say Northwest is positioned to thrive in the years ahead as the industry once again is making money and filling seats at record levels.

But just as the carriers are gaining altitude, they are facing fresh headwinds as rising jet fuel costs eat into profits and consumers are resisting fare increases and cutting back on air travel, due in part to the downturn in the housing market.

“The domestic operations of all the major U.S. airlines in the United States are still under pressure,” said Vaughn Cordle, who runs AirlineForecasts in Washington, which tracks the airline industry. “We’ve crunched the numbers for the 34 major airlines in the industry that make over $100 million in revenue each year and we estimate that the industry is coming up $8 billion short in revenue for this year relative to what they need to break even, and they need to raise fares by about 7 percent across the board to return to normal.”

Northwest and three other "legacy" carriers all have been through bankruptcy in recent years: Delta, United and US Airways. The airlines already were hurting as the economy slipped into recession in early 2001, and then came the terrorist attacks, which severely affected travel for both business and leisure. At the same time lower-cost carriers led by JetBlue and Southwest were challenging the traditional fare structure of their larger rivals.

The carriers are all thriving now, benefiting from a growing economy and lower costs approved by the bankruptcy courts — often at the expense of worker pay and benefits.

But the big carriers still face fierce competition from their smaller, nimbler rivals, which have successfully held prices low even as jet fuel costs have risen, and are not saddled with debt and the cost of an older work force, including pensions and retiree health care, said Cordle.

“The fundamental problem with the U.S. airline industry is there are too many competitors,” Cordle said. “They compete away their revenue, and so they can’t properly invest in their companies. That leads to morale problems and the quality of service going down, and so the product is bad because earnings are inadequate."

He said consolidation would help solve the industry’s problems but is unlikely in the near future. Airline stock prices are overvalued, he said, and consolidation usually happens in an industry's downward cycle. And two recent proposed deals failed to work out: US Airways’ bid for Delta, and AirTran Holdings' offer for Midwest Air Group both were rejected.

Before the economy fell into recession in late 2000, the airline industry was on a roll, riding the economic boom of the 1990s, when business travel rose and fuel prices stayed low. U.S. airlines took in about $5 billion a year in profits from 1997 through 1999 and almost $2.5 billion in 2000, but then lost some $50 billion in the next five years.

Freshly restructured, airlines like Northwest are hoping to recapture some of their former glory. Northwest, for example, used bankruptcy protection to cut costs by $2.5 billion a year, including labor cost savings of $1.4 billion, and cut debt by $4.2 billion.

But difficulties remain. Northwest and other airlines are still burdened with debt, Cordle notes, and worker morale is low. In bankruptcy, Northwest faced severe criticism from workers who were forced to make sacrifices. In 2005, the airline replaced about 4,400 striking mechanics with non-union labor and outside vendors. And the airline battled its flight attendants union, ultimately winning court approval to void its labor contract and impose concessions on the employees.

Cordle also notes that the carriers’ domestic losses are being offset by gains in overseas routes to South America, across the Atlantic and east to Asia. But he adds that U.S. airlines are likely to face stiff competition in the years ahead from foreign-based airlines like Ireland’s Ryanair and Britain’s Virgin Atlantic who are expected to take advantage of a recently sealed “open skies” pact between the United States and the European Union, which promises to give more carriers access to profitable Atlantic routes.

“The legacy airlines look like they are in really good shape because of their international operations,” said Cordle. “They can use that to growth to offset weakness in the U.S. market, but they are still in trouble. For them, the U.S. market accounts for about 70 percent of their operations, so as long as that sector is weak, it’s not good for them.”

Aviation consultant Michael Boyd, president of the Boyd Group in Evergreen, Colo., sees potential gains in legacy airlines’ “hub and spoke” distribution model, which he says will allow more established U.S. airlines like Northwest to take advantage of future growth opportunities inside the United States.

Carriers like American, Continental and Northwest, which have a mixture of bigger and smaller planes, are best suited to profit from the type of industry growth in travel to U.S. regions in the South and Southwest. JetBlue and Southwest, on the other hand, are about to introduce a large number of new jets that are mainly medium-ranged and not well-suited to carrying international passengers to new growth regions in U.S. states like Mississippi, Georgia, Indiana and Alabama, Boyd said.

“There’s only a certain type of market you can access with a Boeing 737,” said Boyd. “You can’t go to Shanghai or Shreveport in it, but you can go fight with other carriers for the popular Las Vegas or Florida market. That’s vacation stuff, and those markets are getting saturated so it’s hard to stimulate new traffic in them.”

“The wave of the future is Northwest; it’s not Southwest,” Boyd continued. “Now that could change because Southwest know it’s in trouble, but a company like Northwest has its costs down, the right revenue streams and structure. In the future the real growth is going to come from secondary markets like Montgomery, Ala.”